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Saturday, June 25, 2016

They say we get the politicians we deserve but recent weeks convince me we also get the election campaigns we deserve. When we're moved more by scare campaigns than by policy debate, guess what the pollies give us?

To the extent that we have been debating policy choices, we've had economic policy but much less social policy.

That's pretty standard for elections. The Coalition's offering has been mainly about its "plan for jobs and growth".

What could be more important than that? Ignoring climate change, not much – provided we remember that the income from jobs and growth needs to be shared widely and fairly, including with people unable to work.

They haven't mentioned it much in the campaign, but our politicians and their economic advisers are worried that our prospects for economic growth are weak because our productivity – production per worker – isn't improving as much as it used to.

In its latest annual economic outlook, the Organisation for Economic Co-operation and Development – a club of mainly rich nations – very much shares that concern.

The two issues are interrelated. Although the report doesn't canvas the respects in which inequality may be contributing to weaker productivity improvement, it does emphasise that the policy measures we choose to improve productivity could come at the expense of worsening inequality, or could improve both productivity and income equality at the same time.

That's one of the big discoveries of the international economic agencies in recent years: whereas economists have long assumed that "efficiency" and "equity" (fairness) are conflicting objectives, there are various policy choices that can bring us more of both.

Part of this is their realisation that the size of a country's government – its level of taxes and government spending – has little bearing on its government efficiency and rate of growth.

The report notes that most advanced economies have experienced slower rates of productivity improvement since the early 2000s.

Income inequality – the gap between the highest and lowest incomes – has been widening for the past two or three decades.

"The productivity slowdown and the rise in inequality have impacted the wellbeing of many workers and their families. Low- and middle-income households have had to cope with slow-growing, and in some cases stagnant or falling, real incomes," the report says.

"These trends are threatening progress in living standards, fiscal sustainability and social cohesion."

(If you wonder why so many Americans have flirted with a clown like Donald Trump, I think it's their uncomprehending way of reacting against the fact that so many of them have gained so little extra real income from the United States' economic growth over the past 30 years.)

In a well-functioning economy, wages – real, not just nominal – should rise in line with the improvement in the productivity of labour.

So the report says lower rates of productivity growth have been bad news for workers, since this has reduced the room for productivity-driven growth in real labour income (wages).

But it's worse than that, for two reasons. First, average real labour income across the OECD's rich member countries has grown less than productivity has grown.

That's particularly true for the US but, according to the OECD's calculations at least, also for us.

Second, the inequality of labour income has increased, with some employees getting much bigger wage increases than others.

Over the period from 1990 to 2013, the rich members' labour productivity grew by 3.1 per cent a year until 2000, then by just 0.9 per cent a year for the past 13 years.

But whereas productivity improvement averaged 1.8 per cent a year for the full period, average real labour income improved by only 1.5 per cent a year.

And remember that, because of the presence of a relatively small number of very highly paid employees, the average (mean) income is always higher than the more-representative "median" (dead middle) income, which improved by just 1.3 per cent a year.

But it's worse even than that. Since 1990 the real disposable income of the top 10 per cent of households has increased by 30 per cent, whereas that of the bottom 10 per cent has increased by only 4 per cent.

(Note that "labour" income becomes "market" income when you add households' capital income – from profits, dividends, rent or interest earnings – and then becomes "disposable" income after you allow for taxes paid and welfare benefits received.)

So what can be done to tackle the "twin challenge" of weak productivity improvement and worsening inequality? You look for those policy changes that create "synergies" between the two.

The report says productivity growth has slowed partly because of weak demand since the global financial crisis. Governments need to stimulate demand (spending) by making more use of fiscal (budgetary) policy, it says, implicitly criticising the resort to policies of "austerity" by governments in Europe and elsewhere.

This would not only reduce inequality immediately by reducing unemployment, it would help reduce inequality more permanently because "long-term unemployment erodes the skills of workers and their earnings prospects".

In resorting to fiscal stimulus, the emphasis should be on increased public investment in infrastructure because this adds more to demand than do tax cuts or increased recurrent spending – it has a larger "multiplier" effect.

The report says government effectiveness in delivering high quality services – such as education, health and transport – is empirically associated with higher economic growth and productivity, plus lower income inequality.

"The empirical links of better and more education [particularly early childhood education] with higher growth, productivity and equality suggest long-term benefits from a greater share of education in public spending," it says.

If we were having a more adult election campaign, these are issues we'd be debating.